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Jeruba's avatar

Why does Elon Musk need financing?

Asked by Jeruba (55500points) April 25th, 2022

The Associated Press story on today’s announcement of Musk’s purchase of Twitter for $44 billion says this:

“The deal was cemented roughly two weeks after the billionaire first revealed a 9% stake in the platform. Musk said last week that he had lined up $46.5 billion in financing to buy Twitter, putting pressure on the company’s board to negotiate a deal.”

I’ve seen similar statements in reports of other transactions, including some of Trump’s. There’s some kind of principle or strategy here that I don’t understand, being a person whose transactions involve far fewer zeroes. Why would someone who can afford to make a big purchase outright choose instead to get financing?

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14 Answers

Hawaii_Jake's avatar

I hope @zenvelo will answer.

I think it has something to do with trading in shares of a publicly traded company. There might be regulations about how much of the company lobe person can own.

smudges's avatar

He might make more interest on his own money than the amount of interest he would have to pay on a loan. ¯\(ツ)

filmfann's avatar

His money is tied up in other things.

Brian1946's avatar

I basically agree with @filmfann.

Per Google: “Elon Musk currently has about $3 billion in cash or other somewhat liquid assets after spending $2.6 billion buying a 9.1% stake in Twitter in recent months, according to Bloomberg calculations. Even for the world’s richest person, $43 billion is a steep price.”

Lightlyseared's avatar

Rich people don’t spend money if they don’t have to. That’s why they’re rich.

LuckyGuy's avatar

Most of his wealth is tied up in Tesla stock. To get cash he would need to sell some and pay huge capital gains tax. Rather than paying tax he borrows the money at a low rate using the stock as collateral.

LadyMarissa's avatar

The super rich do NOTHING that doesn’t make them MORE money!!! When their money is invested properly, they will pay LESS in interest on their loan than they will LOSE on rearranging their current investments. A VERY SMALL amount of their worth is in actual cash.

Blackwater_Park's avatar

This is like a mortgage. He has sufficient assets and income streams to cover the financing of this purchase but not that much cash just sitting around. It would be pretty stupid to have that much wealth in cash and not in assets. In the end this will be another cash flow that if calculated correctly will be a net gain. Rest assured Musk knows to the dollar the NPV ( Net Present Value) of buying Twitter.

HP's avatar

The above answers are all on point. No one is liquid to the point of 40 billion dollars, and as stated, you always leverage and risk the money of others as opposed to your own if you can get away with it. Musk is almost certainly more interested in control of twitter rather than ownership.

zenvelo's avatar

@Jeruba Your wonderment of ”...someone who can afford to make a big purchase outright” as explained by others above is that he cannot make the purchase outright. He has the net worth to have his financing collateralized, but only banks can get that kind of cash together to pay off the cost of the purchase.

@Hawaii_Jake Yes, there are restrictions on how much of a company can be owned, and SEC regulations about filing ownership reports. hat is one of the thinsg that drove Musk into considering buying the company outright. Once he had 9%, he was asked to sit on the Board, but with a restriction that he could not buy more than 15% of Twitter. So last week, when he decided to buy the company, he made a filing with the SEC to notify them (and other shareholders) of his intent.

Twitter is not a very profitable company; it has only turned a profit occasionally since 2017, and lost money last year. Musk will need to figure out a way to sufficently monetize the company to pay off his financing.

kritiper's avatar

As with any person who is worth lots of money, the money is tied up in investments and not readily available as “cash.”

RocketGuy's avatar

Definitely didn’t want to use is own money. If there are any losses, the lender eats it, not him.

zenvelo's avatar

Tesla stock has lost $125 Billion in value following Musk’s Twitter deal.

And the MIT Initiative on Digital Economy thinks Musk is in over his head.

zenvelo's avatar

As of this morning, (4/29) the spread between the current price of TWTR stock and the tender offer price is $4.60. There is a lot of speculation the deal will collapse. The market is pricing it at about 80% probablility it will go through.

To quote one market observer, “There is a chance Mr. Market does not like this deal and will continue to pressure Mr. Musk via his holdings of Tesla. It could get ugly.”

Tesla stock is down 20% since April 4.

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